Mueller made his remarks during a luncheon presentation at NationsBanc Montgomery's 15th Annual Hospitality Conference that has attracted 69 companies from across the nation and more than 200 attendees from the investment community. The Conference, featuring presentations and panel discussions geared around the premier growth companies in the lodging, lodging REIT, timeshare, cruise line, ski, gaming and restaurant industries, started Monday, Feb. 2 and will run through Friday, Feb. 6 at the Pierre Hotel.
"There's still room for investors to `check in' to the lodging industry," said Mueller. "Companies enjoyed excellent earnings growth in 1997 and we expect to see similar growth in 1998 and 1999."
Mueller noted that the lodging industry outlook looks positive for a number of reasons, including: a favorable supply/demand balance in many industry segments; gradually rising real estate values; revenue per available room (RevPAR) growth exceeding inflation; ongoing consolidation; and continued favorable profit growth.
Supply growth continues to be constrained, especially in the full-service lodging segment where the cost to acquire facilities remains less than the cost to replace them, said Mueller. Additionally, limited available financing poses an obstacle to new construction, allowing the already-existing facilities to raise room rates and therefore increase earnings.
In drawing a comparison to previous recoveries such as the one that occurred between 1975 and 1979, Mueller noted that the lodging industry is just now entering its fifth year of recovery in real room rates. There is still a strong likelihood that the industry will see a more significant increase in room rate growth over the next couple of years, he said, given continued moderation in supply growth and continued real GDP growth.
Additionally, Mueller explained that continued consolidation and acquisition activity should result in incremental growth opportunities for lodging companies.
In his remarks, Mueller highlighted five attractive investment areas in the lodging sector:
Urban, upscale, full-service hotels -- Limited supply growth and favorable demand make this segment attractive. Companies also benefit from significant pricing flexibility and substantial operating leverage. Mueller's stock picks in this group are: CapStar Hotel(a), FelCor Suite Hotels(a), Hilton Hotels, Host Marriott(a), Marriott International, Patriot American(a), Promus Hotel and Starwood Hotels and Resorts.
Extended-stay segment -- This segment also benefits from a very favorable supply/demand balance, with outstanding unit economics for development. Mueller's stock picks in this group are: BridgeStreet(b), Candlewood Hotel(a), Innkeepers USA(a), Prime Hospitality(a), and Suburban Lodges(a).
Companies engaging in extensive remodeling/repositioning -- Well-located hotels that can convert older facilities to "like-new" condition will realize favorable returns according to Mueller. Mueller recommends the following stocks in this group: American General Hospitality(a), Bristol Hotel(a), Servico(a), and Sunstone Hotel Investors(a).
Lodging real estate investment trusts (REITs) -- Lodging real estate investment trusts (REITs) performed very well in 1997 and Mueller expects growth in this area to remain favorable in 1998. REITs represent an attractive vehicle for participating in the overall industry's recovery and the growth prospects for REITs are significant as acquisitions continue to increase asset value and as occupancy and room rates rise.
Mueller recommends the following lodging REITs: American General Hospitality(a), FelCor Suite Hotels(a), Innkeepers USA(a), Patriot American, RFS(b) Hotel Investors, Starwood Hotels and Resorts, and Sunstone Hotel Investors(a).
Timeshare segment -- The timeshare segment is one of the fastest-growing areas within the lodging industry, according to Mueller. Mueller is bullish on the timeshare sector for a variety of reasons: the rapid rate of growth both in sales volumes and number of owners; strong consumer appeal (he noted a 93 percent satisfaction rating); excellent unit economics in terms of development, sales and financing; and fragmentation within the sector. His stock picks in this group are: Fairfield Communities, Signature Resorts(a), Trendwest Resorts(a) and Vistana(a)(b).
Lodging companies presenting at this week's conference include: American
General Hospitality(a), BridgeStreet(b), Bristol Hotel(a), Candlewood Hotel(b),
CapStar Hotel(a), Carnival, Cendant, Equity Inns, Extended Stay America,
Fairfield Communities, FelCor Suite Hotels(a), Hilton Hotels, Homestead
Village, Host Marriott(a), Innkeepers USA(a), La Quinta Inns, Marriott
International, Patriot American Hospitality(a), Prime Hospitality, Promus
Hotel, RFS Hotel Investors(b), Royal Caribbean, Servico(a), Signature Resorts(a),
Starwood Hotels and Resorts, Suburban Lodges of America, Sunburst, Sunstone
Hotel Investors, Trendwest Resorts(a),
U.S. Franchise Systems, and Vistana(a)(b).
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(a) NationsBanc Montgomery Securities LLC was manager or co- manager of a public offering and/or has performed investment banking or other services for this company in the last three years. (b) NationsBanc Montgomery Securities LLC currently maintains a market in this security.